Bellamy's adds non-organic formula in a tick to China

Bellamy's Australia has gained Chinese approval for a lower priced conventional baby formula in a step away from its organic roots, which analysts say could be a good addition, as it re-enters the lucrative China market.

Bellamy's has a steep path to climb after conceding it lost market share to rivals The a2 Milk Company and to Aptamil in the first half of 2019, when sales and earnings tumbled after a long delay in getting its registration from China allowing it to sell Chinese-labelled products.

The Tasmanian-based company has been waiting for more than a year to get the nod from Beijing. Under new regulations which kicked in January 1, all infant formula products must have SAMR registration (The State Administration of MarketsRegulations).

Following this new deal, Bellamy's can now begin selling a non-organic formula directly in offline channels in China. Offline sales come through Mother &Baby stores and the daigou personal shopper network.

Bellamy's has essentially purchased one of the three brands already approved by the Chinese government for the ViPlus Dairy facility in Victoria, and transitioned this to a new Bellamy's branded product. Bellamy's also entered a take or pay deal with ViPlus for a minimum off-take.

The new formulation-series will be produced at ViPlus. It will target Tier 3 and 4 cities in the China offline market. Bellamy's does not have a non-organic offer, so this will be a new product for the China market.

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Bellamy's Organic has won approval to sell a non-organic range in China. Paul Jeffers

"It marks a move away from the brand's organic roots, but makes a degree of sense given the breadth it offers to the portfolio and the early move it gives Ballamy's in re-entering the China market," said Bell Potter analyst Jonathan Snape, who kept a 'hold' on the stock.

He said it was a positive move, and fills some of the growth trajectory to Bellamy's $500 million revenue target by 2021, "but is still a new product which needs to experience success."

Mr Snape said there are no assurances of the success of the product but has assumed the brand reaches a modest $35 million in revenue by fiscal 2021.

Branding risks

Bellamy's shares were trading down 16¢, or 1.44 per cent lower, at $10.96 by 1220 AEDT, erasing strong gains made since its announcement on Wednesday where it was trading around $9.67 each.

Morgan Stanley analyst Thomas Kierath warned while it does signal Chinese authorities are happy for Bellamy's to have a China label product, it does not change the timeline on its approval process for its key organic formula.

"Bellamy's push into a non-organic product could be met with scepticism given the risks of diluting the brand, with the counter argument being that it could win shelf space and enhance retailer/distributor relationships in China," he said.

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He added that the news would not impact the company's near term earnings outlook.

In February Bellamy's cut guidance and it now expects 2019 full year sales to be in the range of $275 million to $300 million and an EBITDA margin of 22-25 per cent.

This compared with its lowered guidance last October for sales coming in at the bottom end of its guidance for zero to 10 per cent growth on the $302 million achieved in 2018.

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Carrie LaFrenz has more than 10 years experience as a business journalist having previously covered healthcare, retail/consumer goods, industrials and agribusiness. She is based in our Sydney newsroom. Connect with Carrie on Twitter. Email Carrie at carrie.lafrenz@afr.com.au